College may be over and done with (or nearing it), but your student loan balance is far from. Graduation day, in fact, marks the beginning of our real journey towards financial freedom, and it all starts with paying off your debt.
It can be bewildering at first as you try to figure out how to keep track of your various student loans, each with their own repayment terms, interest rates, and penalties for late payments (consider an auto-debit option). Your stress levels can go up several notches as you wonder whether you will be able to repay all loans in time.
“Will I be able to afford next months’ payments?” might be one of those questions you keep asking yourself at the beginning of every month. If thoughts and questions about your college loan repayments stress you out constantly, you are not alone. Staying on track with loan repayments can be a challenge, especially when you consider that many people end up spending more on their student loan repayment than they do on everyday commodities such as groceries, rent and amenities. This can go on for several years after you graduate from college.
In trying to stay on top of their debt, many individuals consider consolidating their student loans.
What Is Student Loan Consolidation?
When you consolidate your student loans, you take multiple student loans and convert them into one single loan. Doing this can simplify your loan repayment, which means you no longer have to worry about the original individual loans, nor do you have to keep track of the monthly repayment dates, interest rates, or any other details. You just have to keep track of one loan.
Consolidating your student loan does mean that you now have to deal with only new terms and conditions, a new interest rate, and a new payment policy. While this means you have fewer details to remember, sometimes, the new rates and terms and conditions may not be as beneficial as the original rates and terms. Before you consider taking your individual federal student loans and consolidating them into one loan, it is advisable to take some time and learn about why you should or should not consolidate your student loan.
Pros of Consolidating Student Loans
You combine multiple federal student loans into one: The biggest advantage of consolidating student loans and one of the biggest reasons why most people consider this option is that it takes the hassle out of debt repayment. The multiple student loans that you have get consolidated into one single loan. No more spending all your free time keeping track of when to make each payment and how much to pay. With loan consolidation, you maintain one record of all your debts. This makes it easier to remember and allows you to stay ahead of your payments.
It minimizes your monthly payment: Different loan consolidations come with different terms and conditions. In most cases, when you consolidate your federal student loans, you end up having to pay a much lower rate of interest than the combination of the original loans. However, you must be careful and read through all terms and conditions carefully as in some cases, the rate of interest is higher than the sum of the originals. Having a detailed discussion with your private student loan lender is crucial in order to understand the exact terms and conditions of your student loan consolidation.
You can choose an income-based plan and pay off the loan faster: Some consolidation plans may offer you the option to choose flexible repayment terms. This can be especially beneficial if you are a new graduate earning an entry-level income, but expect to rise up the ladder quickly and start earning a higher salary in the near future. By basing your repayment on your current earnings, you will start off making lower monthly payments, which will increase gradually over a period of time. An income-driven payment plan ensures that you continue making your payments every month while still having enough to spend on life’s other necessities.
Cons of Consolidating Student Loans
You may end up paying a higher rate of interest: If you consolidate your federal student loans and the new term is extended over a longer time period, you will inevitably end up having to pay a higher rate of interest overall. Done this way, you will eventually pay a much higher amount than you would have had to pay if you had not consolidated your loan.
Some consolidated loans have variable rates: If you are consolidating your loans with a private lender, you may get a low but variable rate. In case the rate of your variable interest increases with time, so will your payments.
You may lose some borrower benefits: If you decide to combine all your loans, you may lose certain borrower benefits. For instance, with your original federal student loans, you may qualify for loan forgiveness. Under this program, a portion or the entire loan amount is forgiven as long as you fulfill certain conditions. However, if you consolidate your loans, you may lose out on this particular benefit. This of course depends on the type of loan consolidation that you opt for.
You may have to pay an origination or processing fee: While not all lenders charge an origination fee, some lenders may charge anywhere up to 2% of the total amount as a fee for processing your consolidation. This amount is typically added on to the total balance of your loans, which will end up increasing your total debt.
For many graduates, student loan consolidation is a good idea but that does not necessarily mean it is right for you. You need to think through carefully, do your research, speak to the lender and evaluate the pros and cons so that you know for sure that you are making the right decision given your circumstances.
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